What is the Global Minimum Tax Deal?

What is the global minimum tax?

Last week, the Organization for Economic Co-operation and Development (OECD) finalized a landmark agreement to subject multinational enterprises (MNEs) to a minimum tax of 15% from 2023. A total of 136 countries including India have agreed to join the historic. a settlement. This will help reallocate more than $125 billion in profits from over 100 large MNEs to help ensure that companies pay their fair share of tax in the countries in which they operate. In a digital and globalized world economy, the deal brings about a fundamental reform of international tax rules. .

What is the ‘two column’ solution?

The OECD’s two pillar solution seeks to address the tax challenges that result from the digitization of the world economy. Under column 1, tax rights on profits in excess of $125 billion are estimated to be reallocated to the market jurisdiction each year. Pillar 2 seeks to introduce a global minimum corporate tax rate of 15%. This minimum tax rate will apply to companies with revenues in excess of €750 million and is predicted to help generate around $150 billion in global tax revenue. annual basis.

What was the trigger for such a deal?

Due to the pandemic and the resulting financial crisis, countries are looking for alternative and innovative sources of revenue to rejuvenate their economies. But large MNEs route their profits through less taxing jurisdictions. This new agreement helps ensure that MNEs pay their fair share of taxes in the countries where they operate and make profits.

Will this tax eliminate competition?

It does not seek to eliminate competition by making deals. Instead, it will ensure fair allocation of profits and tax rights among countries, especially in the context of large and profitable MNEs such as Apple Inc., Google LLC, Amazon.com Inc., Netflix Inc., etc. This will help in reallocating. The right to levy taxes on the host countries from the home country of MNEs where they do business—whether they have a physical presence or not. This will ensure that MNEs with global sales of more than €20 billion and profitability of more than 10% are covered by the regulations.

And the implications for India?

The tax deal would mean the removal of the existing digital service tax and other unilateral measures by 2023. India will need to withdraw the equalization levy introduced in 2016. The purpose of this levy was to tax foreign firms which have substantial customer base in the country but were billing through their offshore units. Experts believe that the tax will be beneficial for India as the effective domestic tax rate is above the threshold and India being a large potential market will continue to attract foreign investment.